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ByShawn Coyne | Published: November 9, 2012

Breaking in and staying inside corporate book publishing is akin to gaining admission to a select New York cooperative building. Tenants are never issued a rules and regulations handbook, but are required to figure out the “way we do things” and abide nevertheless.

Like Random House and Penguin, the Dakota and the Beresford stand firm against the passage of time

If you don’t have the bona fides that indicate you will play by the unspoken rules when you apply, you’ll be declined. And the thing about New York Co-ops, as anyone who has been declined by one or who lives in one currently, is that they never have to give you any reason for rejecting you beyond a formal “While we enjoyed meeting, we regret to inform you…”

But, as in all institutions, there are a chosen few members who are exceptions to the rules. If you are an exception, you will be given quite a bit of leeway by the co-op, allowed to disregard and break convention. Your living in the building increases its value and you are usually some kind of star. If you need to use the service elevator on a Sunday…an accommodation will be made.

Up to a point.

One must never forget that exceptions to the rules may be more equal than others but they will never end up ruling the building.

There’s a similar degree of “not exactly lying, rather withholding information” in book publishing too. It’s more of a subtly indoctrinated “this is the way we do things and if you want to be part of this club you need to do it like this too” mental massaging that takes place during the climb from editorial assistant to fully fledged acquiring editor. Or potential bestselling writer to in-house book a year property. While I did not work in sales, publicity or marketing, nor have I written a blockbuster novel, I’m just about positive that the same thing happens in those cases too.

This form of social control within a corporation is extremely important to maintain in an era of scarcity. Big barriers to enter a market breed scarcity and conservatism once inside. To shake things up is to tempt the Gods. When a mercurial visionary with revolutionary ideas seizes power at an oligarchy in a mature marketplace, the likelihood that the company will fall into chapter eleven is something to bet on.

Let’s not forget that Steve Jobs didn’t become the business hero he became until the transformation of retail computing from high barrier scarcity (remember the $3,000 desktop or the Macintosh 128 at $2500?) to cheap manufacturing abundance (Kindle Fire, Nook, Google Pad, iPad etc). When just about anyone can jump into a market, it takes passion and specificity of purpose to break through.

I think we can all agree that book publishing (like music before it, and video and television slightly trailing) is now an abundant marketplace. What I mean by that is that book readers can get just about anything in digital format this very second or in print (through print on demand technology) in a couple of days. If you don’t believe me, check out this rather interminable piece from The New Criterion http://www.newcriterion.com/articles.cfm/The-digital-challenge–I–Loss—gain–or-the-fate-of-the-book-7468?src=longreads which boils down to “I can get just about anything I want on my computer.”

The abundance analogy in terms of Manhattan living space would be a world filled with very hospitable buildings requiring little bowing and scraping to gain admittance. The only rule for these buildings would be to care and appreciate being a part of the community. The inverse of the old Groucho Marx joke…wanting and being happy to be a part of a club that would admit you as a member.

This begs the question… In an abundant marketplace, is clinging to a business model intent on artificially creating scarcity sound? Or is that strategy eventually unsustainable?

I think the Random House and Penguin merger is the latest in a series of desperate corporate moves to prop up a dying model. It’s the equivalent of THE DAKOTA http://en.wikipedia.org/wiki/The_Dakota and THE BERESFORD http://en.wikipedia.org/wiki/The_Beresford getting together and eliminating a quarter of their apartments in order to attract a better brand of owner. All the while every other building in the city is opening its doors to people wanting to make the edifice a happy and welcoming place.

Yes, in terms of increasing profitability and strengthening the corporation, the RH/Penguin combination will produce immediate dividends.

Random House and Penguin will reduce overhead. They’ll merge their warehouses and accounting departments, shutter a bunch imprints, let go editors, publicists and sales people etc. This “reorganization” will reduce their expenses and that reduction will go directly to the black space on their bottom line. In the short run, they’ll increase their profitability.

Being in the laser focused mass brand business will be great for them, right? Brands are scarce and if you own most of the commercial writing names, like Procter and Gamble, then all will be well…

But, and this is a big BUT, an increase in profitability from the benefits of eliminating corporate redundancies is assuming that the combined RH/Penguin will maintain its annual revenue. If the revenues from the annual sales begin to fall or if the expenses start to escalate again, profitability will decline and RH/Penguin will be back where they started. Not to mention the fact that writers are not brands like The Swiffer. They are human beings with anxieties, fallibilities and prejudices that are not easy to anticipate or negotiate.

All they need to do really is to keep the big brand authors in house and “focus” their energies on the big books, do a lot of social networking right?

But when all of their competitors are also in the brand business… How long will it take before the big five, all desperate for front list stars, jack up the advance guarantees even higher for bankable talent? Yet again, the pool of “unearned advances” will rise at the expense of profitability. And more bloodletting will be necessary to keep the machine online.

Would you like to be let in on a little secret…a little withheld information?

Publishers don’t make any real money on the frontlist anyway (the new books hot off the press) unless they get a big bonanza blockbuster like 50 SHADES OF GREY, which was not the product of big publishing. The way they make money is through the backlist—those thousands of books they’ve published in the past which sell a steady stream of copies year after year…books like THE WAR OF ART.

The trouble for big publishing, though, is that the old boring backlist publishing business (HOW TO MAKE APPLESAUCE, HOW TO TALK TO YOUR KID SO HE DOESN’T BECOME A JERK, HOW TO BUY A CAR…) is drying up for them. This is why RH and Penguin are merging. They aren’t doing it to better their frontlist publishing operations—there hasn’t been an innovation in the frontlist business since the Kaiser signed the Armistice—they are doing it to stockpile backlist.

In terms of the frontlist, it’s the same as it ever was. Big publishing is still catering to a scarcity model that puts a premium on big brand bestsellers. That made sense in the old days because if your publishing house was well known and had a ton of bestsellers, it was easier to sign up the bread and butter backlist titles. You could take a short term loss on your frontlist for long term gain from the titles that somehow stuck and sold year after year.

But here is why this grand scheme will mirror the record business. In the era of abundance, the financial incentive for backlist writers (or bar bands with cult followings in the music business) to go with the big publishers is nonexistent.

Here’s the math:

Publishing terms (beyond guaranteed advances) are the same for all of the big publishers. For a hardcover sale, the author receives 10% of the retail cover price for the first 5,000 copies sold; 12.5% of the retail cover price for the next 5,000 copies sold and 15% of the retail cover price for any copies sold thereafter. Their trade paperback royalty is 7.5% of the retail cover price for eternity. Some writers get an escalator to 9% after a hundred thousand or so are sold, but they are the exceptions. There isn’t even really a mass market anymore, so I’ll not get into that royalty standard.

For eBooks, the author gets (ahem) 25% of net revenue. Net revenue means all of the money that comes in after the publisher gives discounts to retailers. I could do a whole post on the 25% net revenue royalty… Suffice it to say that the gentleman’s agreement (remember that whole agency model hullabaloo?) among the Big Six to keep eBook royalties at 25% of net could end up being the LITTLE BIGHORN of the Big Six/Five. Writers play the Lakota, Cheyenne and Arapahoe roles in that analogy by the way.

Financially, being published by Bantam or Avon or Plume makes no difference. Hasn’t in decades. This is why the big deciding factor for an author is how much money the publisher guarantees him as an advance, not the terms of the financial relationship. If the advance never earns out, the author does not have to repay the publisher. If it does earn out, the author gets standard royalties thereafter. Seventy five cents for every $10.00 paperback sold.

Backlist books have never garnered big advances. In fact, a writer was lucky enough to get an advance that would cover the expenses for just writing the book. So if you’ve written a book like THE WAR OF ART, is it a good idea to have a big publisher take care of distributing and selling it for you?

When Rugged Land published THE WAR OF ART in 2002, Steve and I were very happy that we got a very nice advance for the paperback rights from a big publisher. If we didn’t, the book may have never caught on. It may not have gotten the critical paperback distribution to make it widely available. Publishers earned their lion’s share of the revenue for the sale of the paperback by taking care of the expensive and complicated distribution tasks…jumping the barriers of entry that Steve could never consider.

When the license term for THE WAR OF ART came up, though, the industry was completely different. Now Steve’s agent, I walked him through just how different the world was. Steve had been offered an extraordinary advance by his former publisher to renew the license. It was a major multiple of the original advance. Steve couldn’t help wondering why.

I explained to him that with print-on-demand technology and by taking advantage of multiple online retail outlets, Steve could find a critical mass of distribution himself. The barriers to entry had been for the most part torn down. He wouldn’t have to settle for seventy five cents for every copy sold. Instead, he’d be able to realize more than five times that amount for every copy sold.

But wouldn’t he sell so many fewer copies than a big publisher that the difference would turn out to be negligible? He was selling over 20,000 copies a year with the big publisher. There’s no way he’d be able to sell that amount himself, right?

I confessed that I really didn’t know (this was all of two years ago). All I did know was that if he was able to sell just 4000 copies of THE WAR OF ART himself, he’d earn the same amount of money as selling 20,000 with the big boys. And he’d be able to do any kind of marketing or advertising or silly thing he wanted to for the book. No one could say no to him.

Steve said “What the hell, I’d just blow that advance on luxuries like heating and clothing…let’s publish this sucker ourselves…”

Steve’s suspicions about our inability to play at the big publisher level proved correct, though. We haven’t been able to sell as many copies as the big publisher did annually of THE WAR OF ART. We’ve sold about 15% fewer.

The revenue from Steve’s decision funded the entire launch of Black Irish Books and seeded the seven additional original books we have in the pipeline.

Hey, Shawn, this is a hard-hitting and very insightful piece. Bravo! As an author with four books published by Random House, one nominated for a Pulitzer Prize and a National Book Award, I got the rights back on that book, WALKING THE TRAIL, ONE MAN’S JOURNEY ALONG THE CHEROKEE TRAIL OF TEARS, when the publisher mysteriously decided to stop reprinting it. (A book rep there, a close friend of mine, was mind-blown they they were letting it go.) I instantly licensed the title to another publisher, held onto the E-rights and brought it out on Kindle. It’s going strong and, as you pointed out, I get 70 percent instead of a mere 25. Love it! For my fifth book, CIAO FROM ROMA,SPRING IN THE ETERNAL CITY OF LOVE, I didn’t even show it to my agent or Random House. I went straight to Kindle–doing well–and will bring out the paperback in a few months under my own brand, Wild Indian Productions via Ingrams. There’s more than one way to skin the publishing cat, right?

Thank you for the very thorough piece. Very helpful to this indie author. I’ve been in a huge learning curve & it sometimes seems like we’re all in a sea of written work that I don’t quite know how to navigate from a promotional standpoint.

Agents found my book – a blend of sexuality & spirituality – a bit too controversial to represent. (I call it just looking for that front end “sure thing”). So, I created a publishing company to carry this work, as well as the music that accompanies it.

This inspires me to keep believing there’s a place for works of art to intentionally awaken consciousness. My desire is to create passive publishing income streams that I can use to fund educational opportunities for others. I appreciate the new insights you offered here.

My head is spinning, but thankfully so. It always helps to learn more about the inside of publishing, and understand more about the business side of writing. Any advance notice on the pipeline books?

Britt Michaelian

November 13, 2012 at 9:42 am

Thank you for this post. As a writer who has self published and thought I now wanted to shop around my latest work to the “Co-Ops” I am now more certain than ever that I can self publish again and maintain my vision. These behind the scenes glimpses are exactly what writers need to hear about! Thank you for the insight! I look forward to reading more of your work.

Thank you SO much for this. An eye-opener for sure for a newbie writer looking to publish my first book. There is this mystique still that traditional publishing is more validating then sef-publishing, but your blog put the smelling salts under my nose. My perception has shifted and a new opening has been created.

I bought 2 of your books today after seeing your interviewe with Marie Forleo. Can’t wait to dig in gobble them up!